2016 Tax Changes

Capital gains tax for top earners

While there are no major tax law changes for 2016, there are inflation adjustments and other routine changes that may affect you. Especially for top earners, it’s important to take advantage of the tax breaks you’re entitled to. Here are some factors to consider that may help you keep more of your money.

Federal income tax changes

To keep pace with inflation, the IRS has widened the federal income tax brackets and increased certain exemptions, deductions and credits.¹ (See table below.) For additional information, please visit the IRS website.

2016 Federal Income Tax Brackets

Single

Over To Tax rate on ordinary income Tax rate on qualified dividends and long-term capital gains
$0 $9,275 10% 0%
$9,275 $37,650 15% 0%
$37,650 $91,150 25% 15%
$91,150 $190,150 28% 15%
$190,150 $413,350 33% 15%
$413,350 $415,050 35% 15%
$415,050 -------- 39.60% 20%

Married filing jointly / Qualifying widow or widower

Over To Tax rate on ordinary income Tax rate on qualified dividends and long-term capital gains
$0 $18,550 10% 0%
$18,550 $75,300 15% 0%
$75,300 $151,900 25% 15%
$151,900 $231,450 28% 15%
$231,450 $413,350 33% 15%
$413,350 $466,950 35% 15%
$466,950 -------- 39.60% 20%

Long-term capital gains and qualified dividends

A top rate of 15% applies to qualified dividends and the sale of most appreciated assets held over one year (28% for collectibles and 25% for depreciation recapture) for single filers with taxable income up to $415,050 ($466,950 for married filing jointly). Long-term capital gains and qualified dividend income over that threshold are now taxed at a rate of 20%.

Example: If a married couple already has $466,950 of taxable income and an additional $100,000 in long-term capital gains and qualified dividends, the entire $100,000 would be subject to the 20% rate. If, however, they only had $400,000 of taxable income and $100,000 in long-term capital gains and qualified dividends, then $66,950 of the additional amount would be taxed at 15% and $33,050 would be taxed at 20%.

Phase-out of itemized deductions and exemptions

For 2016, the phase-out of certain itemized deductions and exemptions applies to single taxpayers with an AGI above $259,400 and married taxpayers filing jointly with AGI above $311,300.

The alternative minimum tax (AMT)

The AMT exemption amount for tax year 2016 is $53,900 and begins to phase out at $119,700 ($83,800 for married couples filing jointly, for whom the exemption begins to phase out at $159,700). The 2015 exemption amount was $53,600 ($83,400 for married couples filing jointly). For tax year 2016, the 28% tax rate applies to taxpayers with taxable incomes above $186,300 ($93,150 for married individuals filing separately).

Lower tax rates for children

In 2016, children under 19 will pay no federal income tax on the first $1,050 of unearned income (such as capital gains or interest) and will be taxed at their own rate on the next $1,050. However, they will be taxed at their parents' tax rate on unearned income in excess of $2,100. (This will also be the case for full-time college students under age 24, unless their earned income is greater than one-half of their parents' support.)

Individuals age 19 and older (and dependent full-time college students age 24 and older) pay taxes at their own rate.

Increased standard deductions for head-of-household filers

If you qualify as a head of household, the standard deduction increases $50 to $9,300. The standard deduction is unchanged for all other filers.

Increased personal exemptions

For 2016, all taxpayers are entitled to claim a personal exemption of $4,050. That’s an increase of $50 over last year.

Higher health savings contribution limits for families

While the maximum contribution of $3,350 for an individual health savings account (HSA) is unchanged, those with family health insurance policies can contribute up to $6,750. This represents an increase of $100 over last year.

Modest increase in the earned income tax credit

For 2016, the maximum earned income tax credit will increase by $27 to $6,269 for those with three or more qualifying children. Those with two children have a maximum of $5,572, a $24 increase from 2015. Families with one child see an increase of $14 for a maximum credit of $3,373, and taxpayers without children can claim up to $506, up $3 from 2015.

Fixed income cost basis changes.

The final phase of the Emergency Economic Stabilization Act of 2008 impacts cost basis reporting changes for more complex fixed income instruments and are retroactive to January 1, 2016.

Rules for fixed income securities

Properly accounting for the cost basis of a fixed income security is considerably more difficult than it is for an equity security. Cost basis can be affected by accruals of income as well as by elections made by the holder of the fixed income security. The IRS made many changes in the final regulations to help align what a broker would report on Form 1099-B with what a client would report on his or her tax return. For more details, visit the IRS website.

Increased estate tax exemption

In 2016, the unified estate tax exemption is $5.45 million, an increase of $20,000 over 2015.

Additional Resources

Current tax rates and rules

Get more information on tax rates, laws, and rules that apply to your taxes.

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